Date of this Version
Cornhusker Economics, August 12, 2015, agecon.unl.edu/cornhuskereconomics
A simple measure of interest coverage can serve as the basis for a valuable equity management and planning tool for both agricultural cooperatives and rural electric cooperatives (RECs). The timesinterest- earned ratio (TIER) can be used by a cooperative to determine the least-cost mix of debt and equity capital that satisfies a particular interest coverage requirement given the cooperative's rate of return on equity and average interest rate. Identifying the least-cost mix of debt and equity is important because if the cooperative uses too much debt in its capitalization, it may be unable to cover its interest expenses; if it uses too much equity, its capital costs may be greater than necessary.